Financial Accounting Framework Flashcards
What does GAAP stand for?
Generally Accepted Accounting Principles
What is GAAP?
Rules that guide managers and accountants in preparing and issuing financial statements for external users.
Why is the flexibility of GAAP important?
Because it allows for different accounting treatment of certain transactions. This may produce different financial statements results.
What does IFRS stand for?
International Financial Reporting Standards
What is IFRS?
It is a set of principle based accounting reporting standards intended to be applied world wide so financial information follow a common, global accounting language.
What organization started the movement to standardize accounting rules world wide?
International Accounting Standards Committee (IASC)
Who currently oversees the initiative of working with countries to move their standards to IFRS?
The International Accounting Standards Board (IASB) formed from the IASC in 2001.
What accounting method is prescribed by US GAAP?
Accrual Accounting
What is accrual accounting?
This is the accounting method that matches revenue and expenses, regardless of the receipt or disbursement of cash.
Who are external users?
investors, lenders, and other parties that use financial statements to make relevant, efficient, and sound decisions about a company.
What are external users five demands of financial statements?
Financial Statements must:
1. Represent the business activities fairly and accurately
2. Be consistent from period to period
3. Be consistent for transactions that are essentially the same
4. Be transparent or understandable as presented or in conjunction with notes and related schedules
5. Provide full disclosure
Beside accrual, what are other ways financial statement may be presented under GAAP?
- Income Tax basis (seen when accountants use IRS regulations that match directly with the business tax return)
- Modified Cash Basis
- Regulatory Basis
When are GAAP Statements required and not required?
- Required for public companies and regulated industries
- Not required for private companies
What are 2 reason why a company may be considered a publicly traded company?
- Has securities registered with the security and Exchange Commission
- Holds assets in a fiduciary capacity for a bred group of outsiders as one of its primary businesses
What type of entities are excluded from the public company definition?
Government or other public sector entities and non-profit organizations.
What is the main difference between a private company and a public company?
Private companies are businesses owned by a relatively small number of single shareholder and does not offer or trade shares to the general public.
Under what specific circumstances must private companies present GAAP financial statements?
If a CPA is engaged to audit the company
What are five industries that require the use of GAAP financials and may have additional rules?
- Banks
- Insurance Companies
- Non - Profits
- Government Agencies
- Pension Plans
Why do financial statements provided to external users need to have useful information and be easy to understand?
So external users can:
- Make informed decisions, such as whether to invest in or lend to the company
- Project cash flows of future performance
What are the 2 underlying assumptions, in order to consider GAAP statements useful?
- Accrual accounting: expenses are recognized in the period they occur; revenues are recognized when they are earned.
- Going concern: the presentation of financial statements assumes that the business is going to continue indefinitely into the future.
Why is the going concern important to the analysis of a companies financials?
It means that the values presented are not liquidation values but instead what the value would be in an orderly sale in the open market.
What publication is one source that accountants use as reference to determine the application of accounting principles?
The AICPA Professional Standards Publication
what are the 5 qualitative characteristics that make financial statements useful?
- Relevant
- Reliant
- Comparable
- Understandable
- Free from Constrains
